GuruFocus conducted a back test study of Warren Buffett's strategy of "buying good companies at fair prices" for the years from 1998-2008.

Definition

In our database there are 2403 stocks that have been traded from Jan. 2, 1998 to Aug. 31, 2008. We have the complete 10-year financial data and trading prices of these companies for this period. We rank the predictability of these companies based on the consistency of their revenue per share and EBITDA (earning before interest, tax, depreciation and amortization) per share over the past ten fiscal years, and study the correlation between the stock performances and the predictability of the business.

Our study may be subject to these biases and assumptions:

Dividend yields are not counted for investment returns
Effects of price changes due to spin-offs may not be fully adjusted
Study is subjected to survivorship bias due to de-listing, bankruptcy, LBO, M&A, etc.

The correlation between business predictability and investment returns of a company is showed below.

Correlation Between Business Predictability and Investment Returns

Predictables

Non-Predictable

All stocks

Total Number of stocks

570

1833

2403

Total Lost Money

61

830

891

Total Lost More Than 50%

18

412

430

Total Lost More Than 90%

4

86

90

Average Gain

260.6%

100.0%

138.1%

Median Gain

150.0%

13.0%

39.0%

Maximum Gain

2852.0%

11483.0%

11483.0%

Maximum Loss

-100.0%

-100.0%

-100.0%

Annualized Average Gain

12.7%

6.7%

8.4%

Annualized Median Gain

8.9%

1.1%

3.1%

For the 570 predictable companies, we have seen strong correlation between the predictability of businesses and the stock performances over the past 10 years, regardless of the valuation of business at 1998. Accordingly, we have ranked the business predictability from 5-star to 1-star, as shown in this table.

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